A $1.6 Billion Bet on the Mexican Auto Market

U.S. automakers are fresh off a record year, which has compelled Ford Motor Co. (NYSE: F) to invest $1.6 billion to build a factory in Mexico, which will manufacture small cars that are increasingly popular in that nation.
Thanks to persistently low gas prices and low interest rates, U.S. auto sales hit peak levels in 2015. These tailwinds have slowed down a bit, as oil is off its dramatically low levels seen last year, and the U.S. Federal Reserve raised interest rates in December for the first time in nearly a decade.

Mexican auto marketIs Mexico the Next Emerging Market?

When investors hear “emerging markets,” they typically think of the BRIC nations: Brazil, Russia, India and China. While India and China are still reporting high levels of growth in gross domestic product, Brazil and Russia have been besieged by the rout in commodity prices over the past two years.
Meanwhile, Mexico could soon take their place among the world’s premier emerging economies. According to the Organization for Economic Cooperation and Development, after growing its economy by 2.3% in 2015, Mexico’s real gross domestic product is projected to grow in excess of 3% this year and in 2017.
Ford has significantly improved its profitability in the small-car segment, and the Mexican auto market has growing demand for the type of small cars that will be manufactured at Ford’s new facility.
Construction of the facility begins this summer, with new small cars expected to roll off the line in 2018.

Plenty of Gas in the Tank

U.S. consumers sent auto sales into neutral last month. March retail sales unexpectedly declined 0.3% – far weaker than economists’ expectations of a 0.1% increase. Sluggish auto sales were the major culprit. Auto sales dropped 2.1% last month, the largest decrease in just over a year.
But a year-over-year decline should be expected, as the industry overall faced very difficult comparisons from a banner year in 2015. Overall, consumers are still doing very well, and the major auto companies are reaping the benefits. Ford’s decision to expand into Mexico is a natural next step in the process.
Ford’s fundamentals have greatly improved over the past year. Its total car sales in the U.S. rose by 5% last year.
In particular, the F-Series pickup truck continues to sell very well. It remains America’s best-selling vehicle – a span that has lasted 34 years. This provided Ford with $10.8 billion in pretax profit last year, which was a record for the company.
For the most part, Ford’s momentum has continued into 2016. March sales were the best in 10 years. It sold more than 254,000 vehicles last month – up 8% year-over-year – and it booked its best first-quarter results since 2006. And the company expects full-year 2016 results to be at least on par with last year’s results.
Investors appear convinced that Ford’s best days are behind it. The stock is very cheap, trading for just 6 times forward earnings. Considering that the S&P 500 index as a whole trades for over 20 times earnings, Ford shares seem to be on sale.
Ford is highly profitable, is still growing, and in Mexico, it has another compelling future catalyst ahead of it. And for income investors, an added kicker is the stock’s heavy-duty 4.7% dividend yield.
DISCLOSURE: Bob Ciura personally owns shares of Ford (NYSE: F).

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